On Monday, ISER gave a presentation that suggested the vetoes would cost the economy 4,217 jobs and would send the State whirling back into a recession. I disagree.
While it’s ok for us to have different ideas, only one of us will be right. Unfortunately, most people don’t care to find out why our ideas are different. Instead, they accuse ISER of political lobbying to save their funding; and, they accuse me of being a shill for the administration.
The good thing about making forecasts is that you can’t hide your bias once the outcomes are known. If a forecaster is consistently wrong, in one direction or the other, it is exposed by simple observation.
That’s why I can say that not only am I non-partisan and apolitical in my forecasts, the numbers prove it to be true. My forecasts consistently beat other sources. That doesn’t mean I’m perfect, or that I don’t miss by more than someone else now and again. But, overall, my forecasts win. That’s what I do as an economist focused on application rather than theory.
While I do make mistakes, I constantly evaluate my forecast errors, seeking out the causes and figuring out how to improve. So, when I say that I think something will happen, its not based on what I want to be true. It’s based on an error minimizing attempt at understanding what we know and what we don’t.
Forecast Challenge
And so, we don’t have to write academic papers refuting the techniques used by each other. And we don’t need to have Twitter wars, trying to win public favor.
It’s more simple than that. ISER put out a forecast, so I will publish my own. When the data are in, we can compare the results. If I end up being wrong, I’ll own that fact and figure out how to improve.
ISER Forecast
According to the ISER presentation, Alaska will lose a net of 2,892 jobs in the “short-run.” I can only assume that phrase can be applied to the next fiscal year, given the way the numbers were used. This net job loss includes a forecast of 1,325 additions to the economy next year.
FY19 employment averaged 328,300 according to the Department of Labor data. So, ISER is forecasting an FY20 average employment number of 325,408 jobs (excluding military and self-employment).
This means that I can simply say that I’ll put my money on the fact that the actual jobs number will be higher than that. That is, I could just make my forecast 325,409 jobs and see who wins (and I’m pretty confident I would). But, this isn’t “The Price is Right.” So, I’ll do you one better.
My Forecast
My forecast is that FY20 will see an average employment number of 329,373 jobs (an increase of 800 jobs over FY19). Here is how my numbers come out.
I expect the oil and gas sector to lead the way next year, adding over 700 jobs in FY20, mostly in the support services subsector. These jobs will support the development progress of Liberty, GMT2, and Pikka, along with several other projects.
The professional services and construction sectors will also get a boost from the increase in oil field development. I’m forecasting the start of a recovery in the professional services sector adding about 100 jobs next year (mostly attorneys, accountants, engineers, economists, etc. supporting oil field evaluations).
I expect the construction sector to be the leader in growth next year, mostly thanks to an improving oil and gas development, but also thanks to military construction projects. That sector should add about 800 jobs.
The tourism industry should also continue its growth trend (unless there is a lower 48 recession). I’m showing another 200 jobs in that sector next year.
Likewise, the trade sectors should continue the growth they have just started to enjoy as wages have been improving for the last year. While the long-term outlook for retail is negative (as witnessed by the recent closures of Sears and Nordstrom), more income in the hands of Alaskans should lead to a small uptick in labor demand this year.
About a 0.5% boost in employment should translate to about 400 jobs across the trade sectors in FY20 (the indirect impacts of government job losses will dampen this sector’s growth relative to maintaining that spending, but it will take over a year before those impacts show up in the data).
The healthcare industry is the hardest to evaluate. While a reduction in Medicaid funding will dampen some utilization, the demand for nursing homes and hospice care will continue to grow as the population ages. I am forecasting a slowing of the growth rate, but still a positive number across the industry. My forecast is showing a net of 100 added jobs.
Two sectors will probably continue to lose jobs. Those are the information and finance sectors. Each of these have been trending down as the industries are transformed by the digital age. That trend will likely continue, with a combined net loss of about 400 jobs.
Public Sector
That leaves the government.
Around 200 jobs should be added to the federal civilian workforce, as a slight uptick in federal funding has flowed toward Alaska. Local governments payrolls should be fairly flat.
So, the question really boils down to how hard the State employee count will be hit. Of the vetoes, only the cut to the University will be significant to the government jobs total. The other vetoes are likely to be more impactful at the micro level than will be observed in the macroeconomic data.
For example, school debt reimbursement will likely result in increased local taxes, but is unlikely to result in direct job losses. Cuts to social programs are likely to impact the wellbeing of those losing that service (especially if not offset by a larger PFD), but is unlikely to cause significant job losses (especially if government funding is replaced by charitable giving).
The number of state employees being terminated is estimated at less than 100 people. But, the impact of lost state support for the University is unclear. The extent of job losses will depend on how the funding reduction is handled.
University of Alaska
To understand that point, let’s take a look at the University funding as reported on the Legislative Finance Division website.
As you can see, State support for the University increased steadily until 2014, when the funding topped out at $372 million. From 2015 to 2019, a total of $51 million was clawed back, returning funding to the 2010 level of support.
Meanwhile, other funding sources have continued to increase. The total 2019 budget for the University would be a record high, if those other funds show up (the “actuals” for FY18 and FY19 weren’t available when I pulled these data, so I am showing the authorized spending. That spending isn’t guaranteed to show up like state money is. Therefore, don’t get too excited about those last two years just yet).
Looking at how those funds are spent, the largest cost of running the University is clearly the salaries for its employees. The next largest cost appears to be the maintenance of the campuses.
Of note, the cost of personnel decreased since 2015 by about $37 million while state support decreased by $51 million over that period.
The question at hand is how the reduction in state support would translate to a reduction in staffing. The following graph shows how changes in total funding has been allocated in the past.
What is not clear is exactly how the University will deal with the reduction in state support of the magnitude it faces this year. However, assuming the previous relationship between state funding reductions and expenditures on personnel is informative, it appears that $94 million would be absorbed as cuts to salaries. At an average full time employee cost of $120,478, that implies that 783 people would lose their jobs. The remaining cuts would impact the private sector (captured above) rather than government employees.
Of course, the actual number could be higher if they fire lower salaried employees; or, lower if they find a way to replace their lost funding.
What About the PFD?
Right now, the only way that legislators are discussing funding these programs is through reducing the Permanent Fund Dividend. Does a larger PFD offset the job losses from the budget cuts? That’s easy. No.
A larger PFD would certainly improve the lives of individuals (and would reach more people than spending the same money on a government program would), but it won’t stimulate the economy by much.
The data are pretty clear about that. Because the PFD is a lump sum payment that comes just before the winter, most of that money leaves the state without creating jobs. While there would be a boost in small business profits, and some part-time employment, a larger PFD is more about quality of life improvements (especially among the impoverished) than economic stimulus.
So, while there would be an increase in the trade sector (captured above), it would be small in comparison.
Growth from Investment?
Another idea that is thrown around a lot is that a smaller government can encourage more private investment. This is true, but you won’t see it in the short run.
Investment decisions are made after thousands of hours of due diligence and deliberation. Part of that process is an evaluation of the disposable income of the market and the tax structure of the region.
By increasing the personal income (larger PFDs) of the population and reducing the threat of tax increases by stabilizing the State’s financial position (smaller budget), this impact is possible.
However, this is a long-run impact that doesn’t show up in the jobs forecast for next year.
Back in Recession?
One of the comments that I do take issue with is the assertion that these budget cuts will push Alaska back into a recession.
To be clear, the reductions to the public sector will offset some of the growth in the private sector. But, I believe the base economy is positioned well enough to remain strong as the government scales back.
With the vetoes in place, Alaska slips back into a recession in 31% of the simulations I ran. That compares to 12% of the simulations with no vetoes. Most of those situations occur due to global economic forces pushing down on growth everywhere or another collapse in oil price.
So, the most I would be willing to say is that the near-term chances of another recession go from unlikely to possible due to these vetoes. But, that is not a good justification for overriding them.
Government and Jobs
Nothing the government does is without a constituency. Every dollar the government spends is a dollar that helps someone. Perhaps by providing healthcare, or education, or a warm place to stay during a cold winter’s night.
But, the reality is that the government is not a jobs program. If jobs were the correct measure for assessing the worth of a program, the maximizing strategy would be to hire every unemployed person for minimum wage to shovel the sidewalks in the winter and pick up trash in the summer. That program could bring the unemployment rate in Alaska to 0% at a cost of about $450 million.
But we don’t pay people simply for the sake of saying they have a job. We pay them for the work they do. That work creates value to society. And, to be worth paying for, that benefit must be greater than its costs.
Yes, cutting government spending does mean losing jobs. It happens exactly the same way that firing an employee does. When times are tough, jobs are lost. But, you can’t keep paying someone if they are not generating value or if you don’t have the money. Otherwise, that is just a glorified welfare program.
If a program cannot justify its cost, and it relies on its contribution to “the economy” rather than to society to support its funding, there’s a very good chance it is not worth paying for.
The Impact of Vetoes
I wish people would focus on that correct measure of public policy. That is, what is the value being created versus the cost of providing the service. Then, ask the question of how to best pay for that service.
If only we could focus the conversation on those questions, I wouldn’t have to write these unpopular realities attached to my name. But, because I’m an economist, and because other economists are weighing in on the issue, I think it’s important that the discussion be well rounded.
Yes, the budget cuts are going to impact peoples lives. In reality, there is certainly another billion dollars of good things that could be funded as well. But, we have to determine how to pay for them.
If we don’t have the money, we have to make tough choices about our priorities. That’s not an easy task. But falling back on the impact on jobs to support funding is a desperate act. Focus on the actual social impacts and the cost effectiveness of achieving those outcomes.
And, if we are willing to pay for those things, but our elected officials are not willing to fund them, the government is not the only vehicle for helping people. Donate your PFD and your time to those causes.
Upshot
Giving money to one person always makes them better off. Taking money from someone always makes them worse off. So, elected officials are always faced with the question “does the good done by spending this dollar justify the bad done by taking it from someone else?”
To often, we only hear one side of the story. We focus on the good things if we support the program. We focus on the evil of taxes if we don’t. But good public policy requires a leader to step back and assess the net effects across all parties.
Budget cuts are always hard. It’s just unfortunate that we don’t pay as much attention to the additions to the budget as we do the reductions. While those reductions in services will certainly be felt, I don’t believe the impacts to the economy will be as meaningful as many people claim.
I don’t even believe that Alaska will return to a recession next year (although there’s always a chance). Our economy is on strong footing and will likely push forward. If there was ever a time that budget cuts could be made without sending the economy into recession, that time is now.
This isn’t a political statement. It’s just econometrics. I haven’t said a word about the worth of any program, that’s a political opinion our elected officials will have to make. And I try to keep political opinions off these pages.
But let’s make one thing very clear. My crystal ball is not filled with doom and gloom, especially not for our labor market. But, time will tell who is right and now we can’t hide from our forecasts.
I agree with your analysis more than the doom and gloom analysis promulgated by those who have a vested interest in the state continuing to fund their programs and I appreciate the time you devote to this.
But you and our elected officials are overlooking more fundamental points. The government is supposed to ‘govern’ rather than ‘provide’. (That is why it is referred to as ‘government’ rather than ‘providerment’.) This means elected officials are supposed to focus on the rules of the game to ensure all participants have the same chance of winning. It is supposed to apply the rules equally – not arbitrarily. It is not supposed to care about the outcome.
In any game, if some participants feel they are not being treated fairly, they will either feel justified in cheating themselves, or they will simply quit playing. In either case, everyone eventually looses when some are favored at the expense of others.
In our current situation, the direct recipients of legislative subsidy are given an advantage over those with less access to the legislators. This makes it relatively easier for them to win the game. They will continue to win, in the short run, but the rest of us are forced to figure a way to cheat or we will simply quit playing the game.
Those who are encouraging the government to provide instead of govern, are corrupting the purpose of having a government.
When I teach public policy, I say there are three roles the government plays. First, to establish the rule of law. Second, to act as the coordinating entity in situations of negative externalities. And third, to level the playing field so that all participants have a more equal opportunity in the pursuit of life, liberty, and happiness. I agree that the government should not become an alternative to work, but there is value to society in doing more than just establishing and enforcing the rules of the game. Where we draw that line is a question for our elected officials.
Hi Ed. Thanks for the article and a different perspective than the one I’ve been seeing. I’m sure that this year’s forecast isn’t the first you’ve made that was different than ISER’s. How have your forecasts fared in the past? What’s your “record” in producing better forecasts than ISER? Do you keep track?
Thanks again.